Can two-part tariffs promote efficient investment on next generation networks?

We analyze if two-part access tariffs solve the dynamic consistency problem of the regulation of next generation networks. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbent's network, compete on Hotelling's line. The incumbent can invest in the deployment of a next generation network that improves the quality of the retail services. We have three main results. First, we show that if the regulator can commit to a policy, a regulatory moratorium may emerge as socially optimal. Second, we show that if the regulator cannot commit to a policy, it can induce investment only when the investment cost is low. Third, we show that in this case, two-part tariffs involve very large payments from the entrant to the incumbent.

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